Libya SWF “Taken For A Ride” By Goldman Sachs?

The Libyan Investment Authority, Libya’s sovereign wealth fund, took Goldman Sachs Inc. (NYSE:GS) to court in London on Monday, claiming $1 billion in damages and alleging that the bank exploited the wealth fund’s limited financial experience and encouraged it to make risky and ultimately loss-making investments.

Goldman Sachs, however, countered that the authority’s case was “a paradigm of buyer’s remorse.”

LIA’s claim against Goldman

As reported in January, Libya’s sovereign investment fund sued Goldman Sachs Group in London’s High Court, saying it lost over $1 billion on now-worthless derivatives while the bank walked away with a profit of $350 million. The Libyan government said Goldman Sachs took advantage of Libya’s young and inexperienced staff. The lawsuit also alleged that the investment bank agreed to hire as an intern the brother of the sovereign fund’s deputy executive director.

In a witness statement filed Monday in London’s High Court, Catherine McDougall, a lawyer from law firm Allen & Overy, said: “I asked them where the due diligence was, and they responded ‘due what?’”She added: “They said that they did not ask for any due diligence — there was no need to since Goldman had advised them to do these trades.”

According to the suit, in 2007, Goldman made a presentation to the authority, explaining that it wanted to establish a “partnership” with the sovereign fund. The bank also offered to train authority employees and senior managers about the financial markets and products, offering it strategic long-term advice and investment options.

Buyer’s remorse

Terming the Libyan Investment Authority’s case as “a paradigm of buyer’s remorse,” the investment bank said the parties knew very well that the payouts under the trades depended on the markets and unfortunately, late 2008 saw the credit crunch and ensuing financial crisis.

However, the authority used a January 2008 email from Andrea Vella, a partner with the bank, to drive home the point that Goldman was trying to exert undue influence on its client.

McDougall talked in the extract read to the court about their “lavish trip to Morocco” and “heavy drinking” and said that the trip was paid for by Mr. Kabbaj, mostly on his Goldman corporate credit card. Youssef Kabbaj was Goldman’s key banker for the authority.